Book Slams Feds for Meltdown Focus

While the markets were coming undone in 2008, securities regulators and law-enforcement types were busy. The problem, said Charles Gasparino, is that they were investigating the wrong thing.

Instead of digging into the fraud that helped fuel the crisis, they were on a crusade to clean up an epidemic of insider trading.

Circle of Friends: The Massive Federal Crackdown on Insider Trading — and Why the Markets Always Work Against the Little Guy tells the story of lying, cheating hedge funders who broke the law so regularly they couldn’t imagine they would ever get caught.

We get all the elements of the insider-trading genre: the bundles of cash (stuffed in Doritos bags), the informants wired by the FBI, the bickering regulators who pout if the media’s latest puff piece focuses on someone else’s agency.

Since the crackdown began in 2008, the U.S. attorney in Manhattan boasts 73 convictions including jailed Galleon hedge-fund founder Raj Rajaratnam.

Gasparino, who is ready with an anecdote about each of his lawbreakers, shares this gem from a Rajaratnam deposition: “I love what you guys do to protect the integrity of the securities markets,” the Galleon chief told his interrogators.

The Feds come away looking almost as bad as their prey. At one point FBI agents arrive outside a Manhattan apartment for an early-morning arrest, camera crew in tow — then speed around the block to stage a screeching halt in front of the target’s building for the cameras’ benefit. Alas, the errant trader had moved to a hotel and couldn’t be escorted to a perp walk.

The author does a good job of putting his stories in context. He shows how the growth of the largely unregulated hedge-fund business was a tinderbox for illegal behavior and explains the history of legal victories that allowed the Securities and Exchange Commission to go after ever-broader categories of insider trading.

While hedge funds were proliferating, Gasparino explains, regulators were gaining the ability to track traders’ funny business on increasingly sophisticated computers. Further strengthening the hands of regulators was that the SEC and the Justice Department grudgingly decided it was in their best interests to work together instead of competing.

But while regulators view insider trading as “the white-collar crime of the century,” according to Gasparino, he argues that it doesn’t directly harm investors the way Ponzi schemes, mortgage fraud and reckless risk-taking by banks do.

Gasparino offers an explanation for the insider-trading obsession: Several unnamed career prosecutors told him the government needed a white-collar scandal to “satisfy the public’s demand for Wall Street scalps” after the crisis. Never mind that insider trading played no noteworthy role in the debacle that almost brought the economy down. Most perpetrators of the financial crisis still roam free.

The book has some lazy writing and sloppy errors — a last name spelled three different ways and the date of a court order to wiretap Rajaratnam’s phone noted as March 7, 2008, in one place, March 10 in another.

And it leaves out important facts when describing regulatory flaps, including the time SEC attorney Gary Aguirre was kept from deposing Wall Street executive John Mack in a 2006 insider-trading investigation. Gasparino notes that Aguirre was fired and then sued the SEC for wrongful dismissal. But he never mentions that Aguirre won $755,000 in a settlement with his former employer.

Still, Circle of Friends is an insightful recap of how we got to the place where insider trading became the favorite target of regulators, and is a good guide on where it all goes from here as investigators continue to pursue SAC Capital Advisor’s Steven Cohen.